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The Real Estate Beat

The Caton Team believes, in order to be successful in the San Fransisco Silicon Valley Real Estate Market we have to think and act differently. We do this by positioning our clients in the strongest light, representing them with the upmost integrity, while strategically maneuvering through negotiations and contracts. Together we make dreams come true.

Month: October 2015

Before you read this article – please note I will share my insight on how to work around this rental crisis in next weeks blog installment. Next weeks blog – http://wp.me/p1GGbd-j9

Bay Area rental crisis squeezing out middle class

Diane Nesom rents a tiny cottage — just 600 square foot and one-bedroom — at the end of a cul-de-sac in Fremont for $1,400 a month. And while that eats up about 50 percent of her take-home pay, the 35-year-old accountant regards it as “a steal” and can’t imagine moving up to a larger rental in the current runaway market.

“I earn too much income to qualify for any kind of affordable housing,” she said, “but not enough income to actually afford anything else, so I’m stuck in this middle craziness. It’s not a fun place to be.”

Maxed out on her budget — “if anything goes wrong, I’m ruined” — Nesom is among the legions of professionals who struggle to navigate the Bay Area’s escalating rental market, where it’s no longer unusual for high-end apartments to fetch $4,000 or $5,000 per month and sometimes more, especially in Silicon Valley hot-pockets like Palo Alto and Mountain View.

Though thousands of new apartments were completed around the region in the last year, the inventory can’t keep up with tech-fueled job growth. With vacancy rates at about half the national average, the demand for housing has sent rents through the roof, creating a sense of desperation for many who are being priced out. According to the most recent data, an average two-bedroom apartment now costs $2,884 in San Mateo County, $2,552 in Santa Clara County and $2,172 in Alameda County. Contra Costa County is a relative bargain at $1,835, though bets are on for how long that will last.

For most of the region, rental prices are up about 50 percent since 2010, and up about 10 percent in the last year, according to the Marcus and Millichap real estate brokerage firm, which crunched the data for this story with help from the MPF Research group.

“Rents are at a historic high,” said Caryll-Lynn Taylor, executive director of Neighbors Helping Neighbors, a Peninsula-based nonprofit that educates clients about the increasingly complex rental market and helps them navigate it. Landlords typically ask tenants to show annual income that’s triple the cost of rent. As a result, many middle-income workers are imperiled. A $2,500 two-bedroom apartment requires $7,500 in monthly income, or $90,000 per year.

“So you rule out our school teachers, most of our firefighters, many of our tech workers,” Taylor said. “And where do they go to rent and live?”

Many displaced tenants spend half a year or more searching for new apartments, she said. Of the approximately 4,900 households with incomes between $50,000 and $160,000 that the agency serves, about 370 are living in their vehicles, mostly in Mountain View and Palo Alto.

Elected officials and citizens groups from San Jose to Richmond are putting new energy behind rent control measures and related efforts to stabilize rents and prohibit unjustified evictions. Richmond has been considering strict rent control and eviction policies, while Berkeley, San Francisco, Oakland, San Jose and a handful of other local municipalities already have rent control ordinances. But many observers believe a long-term solution to the rent crisis requires a pronounced regional effort to increase housing supply, bringing it into better balance with the rate of job growth.

The pent-up demand for housing is taking a toll on Mark and Caitlin Fisch, who live with their three young children in a 2-bedroom apartment in Mountain View that rents for $2,575. A well-paid private schoolteacher, Mark has so far been able to make his payments, while Caitlin home-schools the kids. But with their lease expiring in September, they learned this month that the rent is going up — way up — to $3,600. Their options: sign a new one-year lease at the new rate, go month-to-month at $6,566, or leave. The family expects to do the latter.

“We always knew that there would probably be a raise in rent,” Caitlin Fisch said, “because that seems to be the trend. But we were thinking something on the order of 10 percent.” She suspects the hike is “spurred by the inflated salaries at the tech giants” in town, most notably Google.

Failing to negotiate “the crazy maze” of rentals has led Andrea and Frazier Hubbard to unexpected living quarters: their 26-foot trailer, in which they have camped for the last eight months on the grounds of a church in Palo Alto. Andrea is a Stanford office administrator. Frazier is a business analyst with a firm on the Peninsula. Their combined income is just shy of $100,000, Andrea said, “but you can’t really save when you’re paying thousands of dollars a month for a little apartment.”

By living rent-free in their trailer, they hope to build their savings and eventually buy a house in the somewhat more affordable East Bay.

The rental market is “super-tight,” said John Chang, of Marcus and Millichap. He drew this picture: With so many jobs being created in the last year in Silicon Valley and San Francisco, the Oakland metropolitan area has emerged as “a more affordable alternative” for renters. It’s an “overflow market,” Chang said, “where people looking for better affordability are going. The housing demands in the East Bay are not so much driven by the growth of the employment there, as by the growth in the entire region.”

He cited these numbers: In the last year, San Jose metro led the region in job growth with 59,300 new positions, a 5.9 percent jump that’s nearly triple the national increase of 2.1 percent. San Francisco registered 47,500 new jobs, Oakland metro another 20,900. There is simply not enough housing stock being added to absorb that many people, so they are either doubling up or moving to neighboring areas. And even those “overflow” cities like Oakland are starting to feel overwhelmed.

Joe McCarthy, senior project manager for San Francisco-based Bridge Housing, didn’t know what to expect when the affordable housing developer opened the application process in June for 68 units at the new AveVista Apartments on Lake Merritt in Oakland. For two weeks, lines circled the block as more than 3,700 people applied to live in the apartments, half of which will rent for between $785 and $1,399 per month. The other half, governed by Section 8 subsidies, will rent for about 30 percent of a resident’s income.

“It was the busiest lease-up we’ve ever experienced,” said McCarthy, who attributes the unusual level of interest to “the job generator that has started up in Alameda County and Oakland. We’re seeing a lot more folks looking for housing.”

Nesom, the Fremont accountant, can attest to that.

She recently went apartment hunting with her best friend, Molly Darling, who must leave her $1,300 rental in Alameda this fall. The house Darling lives in has been sold and the new landlord is likely raising the rent.

The duo checked out an open house “for a tiny — and I mean tiny — one bedroom cottage in Alameda,” Nesom recounted. “I mean, it could barely fit a twin bed. And the rent was like $1,500 a month, and there must have been at least 12 people in line when we got there.”

A $1,300 rental is just about the limit for Darling, who works as an office manager: “I can probably push it a little more than that,” she said, “but it’d eat into my groceries. My wages haven’t gone up, but the rents have exploded to the point that I can’t afford to live by myself. I’m boxed in.”

Co-living spaces with dorm-style apartments are becoming a rising trend among millennials, and the businesses that offer these living arrangements have one goal in common: to create and foster community.

Though the idea of cohousing is not new, many businesses are trying to market to younger generations by advertising not only a unique community but a chance to network, share resources, and make friends.

Pure House is one such business that tries to attract people who want to be a part of a certain type of community—although the apartment rentals often come with expensive, unconventional lease agreements.

The community rental company requires that anyone seeking to live in any of its nine fully-furnished residential apartments located in Williamsburg, Brooklyn fill out an application that asks questions such as, “What are your passions?” and “Why do you think you’ll thrive in a communal living space?”

The application process is meant to select individuals who are socially similar and have like-minded worldviews. Residents pay $1,600-$4,000 per month after signing a 30-day membership agreement, which includes communal activities and amenities such as work out classes, maid services, and bicycles.

Businesses with co-living arrangements like Pure House often act as property managers rather than owners of the building.

However, these businesses could run into trouble with city and state laws that prohibit individual room rentals, and they may not be economically feasible, especially for millennials. Campus, which had co-living arrangements in California and New York, will shut down at the end of this month due to economic reasons.

Still, some businesses with a mission of bringing together young, like-minded people are thriving, and others have even announced timelines to open more communal living spaces.

Here is a list of current and up-and-coming co-living businesses:

Common: Opening renovated apartments for rent this fall in Crown Heights and Bedford-Stuyvesant, Brooklyn, N.Y., Common offers community-minded living spaces in major cities with traditional leases. Residents must first apply for a living space to receive a cleaning service and participate in community events.

Krash: The co-living spaces, or “Krash” houses, require an application process and membership with 3-12 month leases. The company has houses in Boston, New York, and Washington, D.C. and is catered toward entrepreneurs, innovators, and founders.

Open Door: With six housing projects, the company acquires and renovates properties and partners with other property owners to create more affordable housing for unique and visionary individuals.

the co.space: Focusing on creating “positive change in the world,” the co.space puts undergraduate students and young professionals under one roof to encourage shared ideas and networking through community events such as house retreats and mentor dinners.

Stage 3 Properties: The real estate company’s mission is to “disrupting the housing industry by reimagining its process, product and price points” while creating housing for the creative class. It has begun construction on 180 co-living units, which will house 400 people by 2017. The leases will be 12 months long.

If you’re thinking about buying a home, you may need less money than you think.

Here’s how to figure out the amount of cash you need to buy a home, and what you can do to buy a home using as little money down as possible.

Contrary to popular belief, you don’t need 20% down. The minimum down payment you need to buy a home is 3.5% down with an FHA loan on a 30-year fixed-rate mortgage. This 3.5% down payment is a factor of the home price on a loan size up to the high-balance FHA county loan limit — which in most places is $417,000.

However, it can be higher depending on the area. For example, in Sonoma County, Calif., it’s up to $520,950, and in some higher-cost areas, such as Marin County or San Francisco County, that number goes up to $625,500 for a single-family residence.

Alternatively, on a conventional loan you need only a 5% down payment on up to a $417,000 loan size. Should your loan size exceed $417,000, another 5% down payment kicks in, for a total of 10% down needed all the way to the maximum conforming loan limit in your county.

What to expect when buying with little money down

First, if you’re buying a home with less money down, know that your mortgage payment will be higher than if you put more down. The three drivers that inflate a mortgage payment are: interest rate, larger loan size, and private mortgage insurance.

You should have manageable monthly debts — including credit cards, car loans, and any form of payment obligations — in relation to your income. Your income will need to be high enough to include the proposed mortgage payment for the purchase price you are seeking, as well as being able to cover your other debt payments.

The down payment percentages are important to know, though it is significantly easier to work with the monies you have or have access to, than to get wrapped around the axle about down payment percentages. Make no mistake, the mortgage company can work this calculation out for you very easily, or you can do it yourself. You can take the amount of money you have and divide that number by the purchase prices in your area to determine the exact dollar percentage.

Let’s say you have $30,000 to spend on buying a home and you know that housing prices in your area are $450,000. That means you have a 6.7% down payment, enough for an FHA Loan. If your loan professional asks you how much money you have to spend on buying a home in terms of your own funds and possible gift funds, the answer should be some sort of dollar amount, not “How much do I need?”

The reason is this: How much you’ll need to buy a home is going to be predicated on the purchase price of the property and is a continual variable until you get into contract. Start with the monies you have. Assuming you have $30,000 to spend on a $450,000 home example, closing costs on a $450,000 home will easily equate to $10,000, so of the $30,000, $10,000 would come right off the top for closing costs leaving you with $20,000 as a down payment, still meeting the cash to close requirements on an FHA loan.

No-money-down options

The VA loan program allows for no-money-down, 100% financing, for U.S. military veterans only.

The USDA loan program also allows for no-money-down, 100% financing, as long as you are purchasing a home in a rural area and you meet the USDA’s annual low-income thresholds.

Other sources of money

Alternatively, gift monies can be used to purchase a home. Typically, lenders like gift monies to come from a blood relative, but check with your lender for specifics. Here are additional funds that can be used for the acquisition of a home, though they each come with their own individual downsides and may not be a good fit for you. Consider all of your options:

Stocks, bonds, IRA and 401(k) monies can be pulled from these accounts to purchase a home, usually with special provisions.

Gift money, as long as it can be documented in some form of a bank account can also be used, along with an executed gift letter.

Selling of personal property — a boat or a motorcycle, for example, can be used for a down payment and/or closing costs — documented with a bill of sale and paper trailing of the funds.

A security deposit refund on you current rental obligation can also be used, but needs to be planned for on the front end so as to properly communicate timeframe expectations with your landlord.

Tax return refund.

Cash can be used as long as the funds have been seasonedin some form of a bank account for the past 60 days.

If want to buy a home or want to get on the path of doing so in the future, here are some steps to consider to help meet this goal:

Identify what monies you have in the bank now, and from what sources.

Next, get “read” on what housing prices are like in your area, through online research or connecting with a good local real estate agent

Take the amount of cash you have and divide that figure by an estimated sales price range in your area so you can get a feel for how much cash you will need to purchase XYZ home. Closing costs become another crucial factor, but the main goal is determining if you have enough cash to play with. Based upon these action steps, talking with a mortgage lender about getting qualified or how much money you’ll need to save in the longer-term picture can be a prudent step in making your future home purchase a success.

As I mentioned in last weeks blog – I’d have an idea how to work around this “rent is too high & I can’t save money for a down payment” mess. Below is an article that when I saw it posted on Facebook – I knew the fella was hurting, frustrated and upset that he wasn’t born on the “rich” side of town. And upon first read – I too was upset! Then I recalled – it’s just how life is – so stop beating yourself up for your lack of royal blood, stop being angry you don’t have more money – and start thinking outside the box.

The biggest hurdle I see theses days, myself included, is saving money for the down payment. Around here, the San Francisco Bay Area – the median home price is $791,000 if it is priced under 1 million and $4,234,000 for homes priced over 1 million. So, let’s focus on those first time buyers homes – priced at around $800,000 – that would take $160,000 for 20% down, which is conventional financing and as low as $40,000 for 5% down loans – which usually require more than one loan to purchase the home. So needless to say – that’s a lot of dough!

And just so you know – you need another 3% (about $24,000) of the purchase price for closing costs – so really a buyer needs to save about 25% to get into the market. Yikes, all that saving while trying to rent a closet in the bay area is liable to frustrate anyone.

So let’s think outside the box. Real Estate is one of the best investments because in general – it has always appreciated. Forget the financial crises of 2007 – real estate is a cycle, and what goes up can go down – but in the long run – which is how you need to look at all real estate investments – real estate appreciates.

So now is the time to pool your resources. How you ask? Find family, friends or investors who are willing and able to help you with the down payment. The idea is called – Equity Sharing – the easy explanation is – you find an investor – who is willing to give you – for example 15% of the down payment while you contribute 5% – to obtain the 20% down requirement. Now, in order to do this right – you need to hire a real estate attorney to draft an agreement between both parties outlining everyone’s responsibilities in said partnership and how the gains will be disbursed.

So the easy explanation goes like this: Investor contributes 15% of the purchase price to buyer. Buyer contributes 5% and all closing costs. Buyer becomes the owner of the home. Investor carries a note or lien on the property. Buyer will then move into home, pay mortgage, taxes and insurance. Buyer will maintain home. Buyer can improve upon home. Per the partnership agreement – in 10 years buyer will need to sell home or pay back the down payment loan.

Here is where the equity comes into play. Let’s say – year 1 the home was worth $800,000 and the investor contributed 15% ($120,000). In year 10 the home is now worth $1,500,000. The home appreciated a total of $700,000. That 15% initial investment will now give the Investor – $225,000 in their pocket (15% of the new value of $1,500,000. Nearly doubling the initial investment!

Now this is a very simple example. There are many variables to this as each equity share partnership is different. The idea of Equity Share is to get buyers into home ownership when otherwise it could take them 30 years just to save up for the down payment.

Now, this could work in more ways than one. A group could purchase a duplex or apartment building. Perhaps they all live there; perhaps part is owner-occupied and part is rented out. The idea here is to pool resources to obtain at minimum a 20% down payment and own real estate and watch it appreciate. I could go on and on with different scenarios – so if you are interested, curious, or have more questions please feel free to email me or call me – info@TheCatonTeam.com – 650-568-5522

Thank you for reading. Now enjoy this article that made me start thinking outside the box!

Millennials who are financially thriving have one characteristic in common

Millions of America’s young people are really struggling financially. Around 30 percent are living with their parents, and many others are coping with stagnant wages, underemployment, and sky-high rent.

And then there are those who are doing just great—owning a house, buying a car, and consistently putting money away for retirement.

These, however, are not your run-of-the-mill Millennials. Nope. These Millennials have something very special: rich parents.

These Millennials have help paying their tuition, meaning they graduate in much better financial shape than their peers who have to self-finance college through a mix of jobs, scholarships, and loans.

And then, for the very luckiest, they’ll also get some help with a down payment, making homeownership possible, while it remains mostly unattainable for the vast majority of young adults.

To start with, most of those who continue their education after high school have families that are able to help financially. A recent report from the real-estate research company Zillow looked at Federal Reserve Board data on young adults aged 23-34 and found that of the 46 percent of Millennials who pursued post-secondary education (that’s everything from associates degrees to doctorates), about 61 percent received some financial help with their educational expenses from their parents.

And yet, even with this help, the average student with loans at a four-year college graduates with about $26,000 in student-loan debt. Millennials who are lucky enough to have some, or all, of a college tuition’s burden reduced by their parents have a leg up on peers who are saddled with student debt, and they’ll be able to more quickly move out on their own, and maybe even buy their own house.

And that matters a lot in the long run: While many remain skeptical about the real-estate market, homeownership is still the primary way that Americans build wealth. But first-time buyers—a group generally made up of younger adults—have been scarce since the recession.

And research indicates it’s not because many of them want to remain renters, but because they just simply can’t save up enough for a down payment, especially not the down payments needed in the expensive urban markets where so many Millennials prefer to live. According to Svenja Gudell, the senior director of economic research at Zillow, “There’s a ton of people out there who want to buy. In our most recent survey in the beginning of the year, we had 5.3 million renters interested in buying over the next year.”

But, because of their student-debt loads, they cannot. “When it comes to taking out a mortgage, they aren’t able to carry that mortgage payment because they have very chunky payments to make to the lenders of their student loans. So that’s certainly holding Millennials back along the way,” Gudell says.

A recent study by the real-estate company Trulia laid it out this way: Imagine an individual who earns $50,000 and is shopping for a $200,000 home (the median U.S. income and house price). This person would like to put 20 percent down.

If he or she follows the popular financial advice to save 10 percent of his or her annual pay, it’ll take him or her about eight years to have that down payment ready to go. If that same person has $26,000 of student debt, which means monthly payments of $280 based on a 10-year repayment plan, it’ll take this person closer to nine years.

But even these numbers are optimistic, with many Millennials owing monthly payments much more than $280 per month, and making much less than $50,000 a year. And in many markets, a $200,000 house is hard to come by. In some of the priciest areas, such as San Francisco, it would take those with a college degree and student loans nearly 30 years to save up enough for a 20 percent down payment. For those without the wage boost that a degree brings, it probably won’t be possible at all.

According to Zillow, 43 percent of Millennials who got help from their parents in paying for school were also able to become homeowners. According to Census data the homeownership rate for all young adults was about 36 percent in 2014.

Then there is the group that the Zillow study dubs “double lucky.” These are the select few whose families had enough money to not only help them with college, but to then also assist them with a down payment on a home. This group accounts for more than half of the Millennial homeowners in the Zillow’s data, though they account for only 3 percent of the total Millennial population.

Only about 9 percent of Millennials whose parents were able to contribute to their post-high school education were also able to help them purchase a home—and the group that had such significant help is an incredibly low percentage of the total Millennial population.

The study calls this a “funnel of privilege”: Young adults with rich parents soon become rich themselves.

“Haves are turning their riches or their wealth into bigger wealth because they are investing in the housing market by simply living in a house,” says Gudell. This advantage is one that these Millennials will carry forward as they earn more than their degree-less peers, and save more than those who were forced to throw away tens of thousands of dollars on rent due to their inability to buy. In the future, they’ll have wealth to pass down to their own kids, continuing the cycle.